Archer and Marmor on Medicare versus commercial insurance

Medicare And Commercial Health Insurance: The Fundamental Difference

As the debate over Medicare continues in connection to America’s fiscal problems, it is critical to understand how Medicare differs from commercial health insurance for working people. There is a fundamental difference between these two types of health insurance plans, one social and one commercial.

The basic difference between Medicare and commercial insurance is that Medicare is designed to absorb risk, serving individuals who have or may have costly and complex medical needs as well as the relatively healthy, whereas commercial insurance is required to protect its business interests by avoiding those most likely to use medical care.

****

But nothing can change the underlying reality that programs like Medicare are designed to absorb and broadly distribute risk, protecting everyone, while commercial insurers are designed to select and protect individuals with the fewest needs.

The belief that competition among private health insurance firms can produce cost savings or higher quality care represents the victory of illusion over evidence. We need to let the existing Medicare system do what it already does effectively: insulate Americans from risk, rather than shift risk to the most vulnerable citizens.

Comment:

By Don McCanne, MD

The fundamental difference between Medicare and commercial health insurance is very basic and easy to understand. Medicare is "designed to absorb and broadly distribute risk, protecting everyone, while commercial insurers are designed to select and protect individuals with the fewest needs."

The explanation of this difference in this Health Affairs Blog entry by Diane Archer and Theodore Marmor should make us question once again why Congress and President Obama chose commercial insurers as the foundation for the Affordable Care Act when what we clearly needed was a universal public program based on improved version of Medicare.

You should read their fairly brief blog entry and then read the replies posted first by Vince Kuraitis and then by Don McCanne. They exemplify the differences between the commercial approach to insurance and the social function of Medicare.

It's really an easy concept to grasp:

Commercial - "Of or relating to commerce, having profit as a chief aim"

Addendum: Since the reply submitted by Don McCanne has not yet been posted on the blog website, both the Kuraitis reply and McCanne reply are reproduced here.

Vince Kuraitis says:

You (Archer and Marmor) make a sweeping statement: No matter what regulations are instituted in an attempt to guarantee their good behavior, commercial insurers will still have an incentive to avoid risk, and they will do so insofar as it is possible.

An equally sweeping rebuttal: this problem is entirely fixable by risk adjusting — paying higher premiums for members that are less healthy. Medicare has already started doing this with Medicare Advantage plans.

Of course, the devil is in the details…and in a debate we’d probably come out in the middle somewhere. Risk adjustment is easier to conceptualize than to do accurately.

…but I think your broad, blunt assertion needs to be challenged.

Don McCanne says:

Vince Kuraitis writes that the authors' statement on incentives for commercial insurers needs to be challenged. It is Mr. Kuraitis' challenge that needs to be challenged since the authors' statement is quite correct.

Commercial insurers do have incentives to avoid risk, and, if subjected to risk adjustment, they have incentives to game the system. This is not suggesting illegal activity. It merely represents "appropriate" commercial activity - activities that are rewarded on Wall Street.

Risk adjustment already takes place in the Medicare Advantage program. An NBER study (Working Paper No. 16977, April 2011) revealed that the Medicare Advantage plans were able to further increase their own advantage and transfer more resources from the relatively sick in the traditional program to the relatively healthy within their plans.

Quoting from the NBER report, "With social insurance programs, however, imperfect pricing can induce private firms to cream-skim, exacerbating the utility consequences of the underlying inequality the program was initially intended to mitigate. At least in the case of Medicare, we find little evidence that risk adjustment has solved this problem."

And from the NBER Digest, "Thus the authors conclude that the Medicare Advantage program both increased total Medicare spending and transferred Medicare resources from the relatively sick to the relatively healthy, and that risk-adjustment was not able to address either of these problems."

Archer and Marmor are precisely correct: "No matter what regulations are instituted in an attempt to guarantee their good behavior, commercial insurers will still have an incentive to avoid risk, and they will do so insofar as it is possible." That is the nature of the commercial approach to insurance, which is in sharp contrast to the social function of the traditional Medicare program.